The Future of Fintech

Fintech will continue to be driven by new and improved technology that will further accelerate the speed of financial transactions, increase efficiency, reduce processing costs, and improve client and customer experience.

Some developments on the horizon include:

• Further digitization of financial transactions, particularly in the banking sector.
• Use of blockchain technology in financial transactions.
• Smart contracts which digitize contract signing, language, and execution of contract terms.
• Additional use of artificial intelligence (AI) predictive capabilities in decision-making processes and automated suggestions to speed transactions and improve client and customer experience.
• Peer-to-peer matching of users of financial products and services with financial sources.
• Further use of cryptocurrencies in financial transactions.

As financial and technology merge they also face unique & emerging risks that needs attention. For example, a payments platform and a Neobank touch different types of customers, hold different amounts of personally identifiable information, and are subject to different regulatory oversight; these distinctions drive varying risk transfer decisions. Fast transactional speed is one of the benefits of fintech; however this requires firms to adapt processes, for example in fraud and regulatory reporting, that will match this speed.

Some firms are not keeping up with these expectations.

• Cross-border transactions: The provision of remote services relies on processes (e.g. identification) operated in another country
• Data privacy: Data may be used inappropriately
• Regulatory Compliance: The Bank Secrecy Act requires all financial institutions including Banks, credit unions, insurance companies, brokers and cryptocurrency exchanges to comply with certain anti-money laundering regulations, including those related to KYC to validate customer identity and countering terrorist financing
• Technology & Cyber Risk: Three major drivers of fintech technology risk are algorithms, cloud, and data. Cyber security challenges in FinTech range from fraudulent transactions, identity theft, application breaches, hacking, ransomware to insider threats and phishing attacks.

Fintech and banks are connecting in multiple ways:

• Banks invest in fintech companies
• Banks establish start-up programs to incubate fintech companies
• Banks partner with fintech companies:
• Originate loans for fintech lenders
• Retail business platform provider - cobranding arrangements
• White label/private label arrangements
• Referral arrangements for a fee
• Banks acquire fintech companies
• Banks launch own fintech solutions

Fintech - Striking balance between digital transformation and opportunities to navigate through Nth Party Risk

Third Party or Nth Party Risk: Given that financial institutions are custodians of significant amounts of third-party data, much of which is personal and sensitive, it is imperative now more than ever to manage and assess the risks and their impact on the existing ecosystem to drive optimum value from their digital initiatives.

Lending organizations on-board Brokers and Dealers who bring risk by virtue of their business model and technology integration. It is essential for the Lending Organization to determine which of these Nth Parties are super critical by determining their Inherent Risk Score (IRR) and some elements that help determine inherent risk are identity verification, volume of transactions, technology integration such as API, Cloud & AI, financial stability, past incidents, software license management, escrow management, sub-contractor relationships, concentration or reliance risk etc.

Based on the IRR, Due Diligence shall be performed on various risk arenas such as Technology & Cyber Security risk, Financial Stability risk, Business Continuity, Compliance to Regulations etc.

Residual Risk Score which is the outcome of Due Diligence Risk Assessment can aid Business to make quantitative 'Go' or 'No-go decisions. The Risk Management framework drives the actions to be taken on identified risks, if any, through remediation, risk acceptance by Business or risk avoidance through the 'no-go' decision

The risk management lifecycle follows through based on the risk appetite and threshold defined by the organization whereby Reassessment and safe off-boarding at the end of the contract are executed which can assist the Lending organization to keep Nth Party risks at bay and thereby meet compliance requirements.

A level-headed attention to risk may also prevent firms and other investors falling prey to any fintech over-hype. The U.S. Securities and Exchange Commission has recently charged the founder of a fintech company with fraud after it was allegedly able to defraud investors and misappropriate funds. The amount raised by the company was $55 million. Greed is the motivating factor of course for both fraudster and victim. Every investor is looking for something for nothing but deals that seem too good to be true usually are. When the dollar signs flash, caution may be abandoned just when it is most needed.